The failure of Silicon Valley Bank on Friday has many fearing a domino effect, despite assurances from Treasury Secretary Janet Yellen, who on Sunday told Face the Nation that “the American banking system is really safe and well capitalized. It’s resilient.”
Among those nevertheless expecting more banks to fail, notably, is William Isaac, a former chair of the Federal Deposit Insurance Corporation, which has been appointed the receiver of Silicon Valley Bank.
Isaac led the FDIC in the early 1980s amid widespread bank failures and high interest rates. In a Politico article published Sunday, he said of the SVB failure, “There’s no doubt in my mind: There’s going to be more. How many more? I don’t know. How big? I don’t know. Seems to me to be a lot like the 1980s.”
He’s not alone. Larry McDonald, founder of the Bear Traps Report, also warned on CNBC that regional banks could face a contagion risk following the SVB collapse.
Several regional bank stocks were halted Friday after steep declines in early trading. Among them was First Republic Bank, a San Francisco lender catering to ventures and wealthy tech-industry clients. The bank said in a regulatory filing it had a “well-diversified deposit base” and “capital levels significantly higher than the regulatory requirements for being considered well-capitalized.”
Former Treasury Secretary Larry Summers, for his part, does not foresee a contagion hitting the banking sector.
“I don’t think this is likely to be a broadly systemic problem,” he told Bloomberg Television’s Wall Street Week, though he did warn of severe consequences if tech startups can’t make payroll due to funds in SVB being frozen. (Mark Cuban issued a similar warning.)
“There is little risk that SVB’s failure will spill over to other banks,” William Chittenden, who teaches finance at Texas State University, recently wrote for The Conversation. “Most banks currently have enough capital to absorb these losses—however large—in part because of efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather any storm.”
He added, similar to Yellen, that “the banking system is sound.”
On Saturday, the FDIC asked officials at small and midsize lenders, including First Republic Bank, about their financial situations, Bloomberg reported. They also reportedly discussed setting up a new special vehicle to reassure depositors—and help contain any panic.
